It's election season.
No, no. I don't mean just in the United States. You don't need me to point out that your neighbor's lawn is festooned with "Vote for . . ." signs. Or that TV is plastered with "Don't vote for . . ." messages. Or that your inbox is full of "Contribute to . . ." appeals.
But the United States is just one of many countries holding elections in the next month or so. If you include formal elections (Brazil and the United States), formal non-election elections (China) and future elections in the making (Italy and France), almost 2 billion people are engaged in some kind of election activity now or will be soon.
Why is that important for you as an investor? Because, by and large, stock markets hate elections.
The problem with voting
Elections aren't predictable. They are hard to hedge, so investors and traders get stuck with a lot of the risk generated by that unpredictability. And, making the unpredictability and risk worse, elections can produce major changes in policy that can change the profitability of industries and, in the worst cases, investing in general.All that means elections make stock markets nervous. That, in turn, can create big moves on little or no real information and intensify normal fluctuations in market sentiment. It's a good idea to pay attention so you can separate the market moves you need to watch from those you don't -- and flag those overreactions that might be buying or selling opportunities.
But first let me use the recently concluded Brazilian voting to illustrate how even an election that's relatively simple to project can make investors nervous.
Will Dilma live up to Lula?
On Oct. 3, Brazil voted for a new president to succeed Luiz Inácio Lula da Silva, who was barred by the country's constitution from running for a third term. There's never been much doubt that Dilma Rousseff -- known in Brazil as Dilma, just as the president is known to every Brazilian as Lula -- would win the election. She is Lula's anointed successor, and she's seen as a relatively colorless but efficient administrator who would carry on Lula's policies -- no small advantage when the president has an 80% approval rating.But while Dilma has never trailed in the polls, in the days running up to the election the race tightened enough to throw into doubt her ability to avoid a runoff by grabbing more than 50% of the vote. According to a poll published Sept. 28, Dilma had a 16-percentage-point lead over her biggest rival, José Serra. But that put her at just 46%, and it was down 5 percentage points from her numbers two weeks earlier and 3 percentage points down from a week earlier.
Most of that loss in the polls went not to Serra but to the third candidate in the race, Marina Silva of the Green Party. On Sept. 29, she had climbed to 14% in the polls, up from 9% a month earlier.
Not much for investors to worry about here, right? A candidate who has pledged to continue the policies of a wildly popular president is far in the lead. Her closest opponent is showing no signs of picking up ground. The worst that could happen is a runoff that she is certain to win.
And yet the market got noticeably nervous. Volume for the iShares MSCI Brazil Index (EWZ, news, msgs) exchange-traded fund and for individual stocks such as Vale (VALE, news, msgs) and Itaú Unibanco (ITUB, news, msgs) slipped on pre-election news Thursday and Friday (though the prices didn't move significantly downward, I should note).
Investment bankers gave interviews saying the election wouldn't affect their plans to raise big money in stock and bond offerings for their Brazilian clients. Fund managers on road shows to raise huge amounts of money to invest in Brazil chanted the "no issue" mantra, too.
But somewhere in the background, everybody remembered 2006 when, shockingly, Lula was forced into a runoff in his bid for re-election after receiving just 48% of the vote.
And in fact, Dilma apparently didn't get enough votes to avoid an Oct. 31 runoff election against Serra, news reports say.
With this as a model, let's go on my tour of the world's elections, near elections and elections to be. I've ranked the list in order of how big I think the effects could be, starting with the likely not-very-big ones and moving to the global-market-shifting ones.
